OIG Issues Fraud Alert on Physician-Owned Medical Device Manufacturers

A fraud alert concerning doctor owned medical device distributors was issued March 26, by the U.S. Department of Health and Human Services Office of the Inspector General (DHHS-OIG), bringing increased scrutiny for the doctor owned businesses. 

The alert (PDF) focused on physician owned distributors (PODs) selling medical devices that were ordered by the physicians themselves for use in procedures they perform on their own patients at hospitals.

The OIG called PODs “inherently suspect under the anti-kickback statute” with dubious circumstances surrounding the business transactions and patient referrals from which they benefit.

These arrangements result in increased profits for the doctors and often involve profit sharing with the hospitals or ambulatory surgical centers where the procedures are conducted. The anti-kickback statute aims to protect patients from medical referrals by healthcare professionals solely based on the influence of financial incentives.

Such kick-backs result in the corruption of medical judgment, over utilization of a particular medical device, increased costs to the federal health care programs and beneficiaries and unfair competition, the OIG warns.

The incentives would cause doctors to “perform more procedures than are medically necessary” and to use the devices which the physician-owned distributors (PODs) sell, instead of other devices which may be medically necessary or more clinically appropriate.

Disclosure Not Considered Enough

The OIG also warns against merely using a disclosure highlighting doctor financial interest in the POD. A disclosure of this nature is often part of testimonials by the doctor, citing why the patient should use the facility in the first place. The OIG alert indicates that this does not offer adequate warning or protection for patients against a conflict of interest of this nature, potentially affecting a doctors medical judgment due to a financial influence.

Other guidance concerning illegal kick-backs has been issued by the OIG, specifically the 1989 special Fraud Alert on Joint Venture Arrangements. While the alert noted it did not wish to “discourage innovation,” it discourages hospitals from using PODs and doctors from joining them.

“The strong potential for improper inducements between and among the physician investors, the entities, device vendors, and device purchasers should be closely scrutinized under the fraud and abuse laws,” said a 2006 OIG letter regarding doctor investments in PODs.

Typically the PODs involved small companies who manufacture orthopedic and spinal device distribution, but can also pertain to other medical device distributors. The discouragement from using PODs may result in boosting business for many of the larger manufacturers, such as Medtronic Inc. or Johnson & Johnson.